The SEC’s Inspector General, David Kotz, has reportedly confirmed that the SEC improperly shredded documents related to closed investigations, and misled another federal agency, the National Archives and Records Administration, which had confronted the SEC last year about record destruction. Mr. Kotz’s report was issued to the SEC and has not officially been made public.
Mr. Kotz’s investigation follows allegations by whistleblower Darcy Flynn, an SEC staff attorney, which were made public by Senator Charles Grassley, the ranking Republican on the Senate Judiciary Committee. Mr. Flynn had criticized the SEC for destroying important records pertaining to so-called Matter Under Investigation, or MUIs, which damaged the SEC’s ability to “connect the dots” in other cases and alleged wrongdoing within the SEC. It is unknown at this time whether Mr. Kotz has referred or will refer the matter to the U.S. Department of Justice for possible criminal prosecution.
The SEC’s integrity has been called into question as a result of its apparent destruction of all the evidence gathered in approximately 18,000 closed investigations and inquiries, including records related to the Madoff ponzi scheme and investigations into the activities of major Wall Street banks.
The SEC’s integrity has also been called into question by Mr. Flynn’s reported examples of how firms under SEC investigation or inquiry improperly ended those investigations by unduly influencing the senior management. According to an article by Rolling Stone’s Matt Taibbi entitled “Is the SEC Covering Up Wall Street’s Crimes?”, target firms have been able to upend investigations because SEC’s top-level people frequently leave the SEC to join the banks they were supposed to regulate (or the law firms representing those banks), sometimes shortly after shutting down an investigation of that firm.
It is not clear whether Inspector General Kotz is examining SEC investigations that may have been compromised by the revolving door between SEC senior management and Wall Street.
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